Balancing Risk and Access: Underwriting Standards for Qualified Residential Mortgages

By Roberto G. Quercia, UNC Center for Community Capital, Lei Ding, Wayne State University, Carolina Reid, Center for Responsible Lending
 

As policymakers develop underwriting guidelines for qualified residential mortgages (QRM) — which are exempt from risk retention requirements for privately securitized mortgages under the Dodd-Frank Wall Street Reform and Consumer Protection Act — both consumer and industry groups have raised concerns about the disproportionate impact that restrictive QRM guidelines may have on low-income, low-wealth, minority, and other households traditionally underserved by the mainstream mortgage market.
 
In this study, we examine the way different QRM guidelines may affect access to mortgage credit and loan performance, with a special focus on historically underserved households. More narrowly, we estimate the additional impacts on defaults and access resulting from setting QRM underwriting guidelines over and above the proposed product restrictions for qualified mortgages (QM), which exclude loans with features associated with higher default rates such as lack of income documentation, hybrid adjustable-rate mortgages with teaser payments, interest only and balloon payments and negative amortization. To estimate the relative changes in mortgage default and access that would occur under different QRM underwriting thresholds, we use a unique, nationally-representative database on loan performance that includes information on loan characteristics and borrower demographics.
 
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